For most people looking to buy a new home, once they’ve found the perfect house, they then need to secure a home loan. When you are starting the application process, you could have some anxious moments about how lenders will view your home loan application. Typically lenders look at factors such as age, occupation and income. In addition to those, your credit score plays an important role in evaluating your application.
A credit score is a number used by lenders to assess your creditworthiness. Simply put, it is a way for lenders to assure themselves of your ability to repay the loan comfortably. You need to understand the factors that affect your credit score, and also to know what is a good credit score to buy a home.
What is the credit score required to buy a house in Australia?
Your credit score signifies your ability to repay a loan on time and provides a gauge of any future risk of default, based on your credit history.
Credit score numbers are between 0 and 1,000, and the higher the number, the better your credit score. Each credit measuring body has different parameters to measure and evaluate credit scores. A good score increases your chances of getting approval on your home loan application.
Most Australian lenders don’t make their credit criteria public which makes finding out the exact credit score you need to qualify for a home loan not easy. To complicate matters further, most lenders don’t depend solely on your credit score to measure your risk; they also rely on their own internal credit evaluation yardsticks.
So, what is the minimum credit score to buy a house, you might wonder. While it is difficult to put your finger on the exact cut-off mark to qualify for a home loan, some benchmarks help to determine if your score will make the cut.
Below 509 (below average) – If your score is below 509, you likely fall into the high-risk category, and conventional lenders may be reluctant to grant you a home loan. There are a few lenders who might still consider your application even with a low score, but the interest rates are usually very high. We’ll discuss ways to get a home loan with a low credit score a little later.
510 to 621 (average) – A credit score in this bracket usually means that you have some negative marks in your file, and lenders might ask for more information before they’ll consider your loan application.
622 to 725 (good) – This is a good place to start from, and a number in this range vastly improves your chances of getting approval on your home loan application. You should also have access to lower interest rates than those with average credit scores.
726 to 832 (very good) – Congratulations, you’re part of the top 40 per cent of creditworthy Australians. Most lenders will be eager to have your business and will gladly offer you a home loan.
833 to 1200 (excellent) – An excellent score is one that lenders consider to be extremely low risk, and lenders will be keen to offer you a loan. Approvals are generally quick, and you will have more options to choose from than those with lower scores.
Can I get a home loan with a low credit score?
The chances of getting approval on your home loan application with a score above 600 are high. But can you still get a home loan if your credit score is below 500? Yes, you’re still eligible for a home loan but only from a specialist or non-conforming lender. These are lenders who offer what is known as bad credit home loans to high-risk borrowers with low credit scores. Bad credit home loans are similar to regular home loans, but with much higher interest rates and less choice home loan options. These limitations are due to the risk associated with lending to people with low credit scores which are perceived as greater for the lender.
Bad credit lenders still have their own internal guidelines regarding which loan application they approve, which often depends on a variety of factors. It may be helpful to use the services of a mortgage broker in such a scenario, as they can suggest which bank is likely to have a home loan product that suits your needs. Applying with a lender directly and getting rejected will negatively impact your credit score further because each application submitted will reflect on your credit file.
What’s the minimum credit score for a home improvement loan?
Not all home loan applications are for the purchase of a home or an investment property. Perhaps you’re looking to finance a home renovation project and wish to borrow money. In this case, applying for a home equity loan or home equity line of credit is one way of getting the money you need to complete your renovation. Once again, your credit score is a key factor considered by lenders at the time of evaluating whether you qualify for a home equity loan.
A score between 660 and 700 is considered acceptable, but some lenders might charge you a higher interest rate. Some may even wish to look at other financial factors, such as your overall debt, your debt-to-income (DTI) ratio or the amount of equity you currently hold.
A DTI ratio gives an idea of your total monthly debt payments, and it is calculated based on how much you earn and how much you spend on your recurring debts and liabilities. These include credit cards, existing loans, tax debt, etc. Most lenders look for a low DTI ratio, nothing more than 40 to 43 per cent of your monthly gross income. If you have a low credit score, then a low DTI can work in your favour and give the lender more confidence to offer you the loan.